Abstract

Citations (2)

Footnotes (102)

Using the URL or DOI link below will
ensure access to this page indefinitely

Based on your IP address, your paper is being delivered by:

New York, USA

Processing request.

Illinois, USA

Processing request.

Brussels, Belgium

Processing request.

Seoul, Korea

Processing request.

California, USA

Processing request.

If you have any problems downloading this paper,please click on another Download Location above, or view our FAQFile name: SSRN-id1571541. ; Size: 294K

You will receive a perfect bound, 8.5 x 11 inch, black and white printed copy of this PDF document with a glossy color cover. Currently shipping to U.S. addresses only. Your order will ship within 3 business days. For more details, view our FAQ.

Quantity:Total Price = $9.99 plus shipping (U.S. Only)

If you have any problems with this purchase, please contact us for assistance by email: Support@SSRN.com or by phone: 877-SSRNHelp (877 777 6435) in the United States, or +1 585 442 8170 outside of the United States. We are open Monday through Friday between the hours of 8:30AM and 6:00PM, United States Eastern.

The Congress within the Congress: How Tax Expenditures Distort our Budget and our Political Processes

Tax expenditures have grown in importance to the point where they are now the dominant instruments for implementing new discretionary spending policies, and operate at a cost in forgone revenues unmatched since the Tax Reform Act of 1986. While it is true that some forms of government intervention are best delivered through the tax system, it cannot be the case that neutral design principles would lead to a situation where the federal government spends twice as much through tax expenditures as it does through explicit discretionary spending programs.

This paper, the Fourteenth Annual Woodworth Memorial Lecture, is a meditation on the corrosive effect of tax expenditures on the federal budget and Congressional political processes. Tax subsidies erode our ability to conceptualize the size and activities of government, or to engage in constructive political discourse about our allocative priorities in a world of scarce resources. The paper therefore attempts to shift attention from the decades-long debate over the normative tax base from which tax expenditures should be identified to the more pressing questions of how the political process privileges tax expenditures over explicit outlays, and how in turn the lower salience of tax expenditures distorts policy making.

Tax expenditures are privileged because they are not treated as spending for any budget purpose: instead, they are budget “nothings,” and their costs are simply subsumed into the revenues baseline. The result is that their efficiency costs are typically under-appreciated (as developed in an extended fable about the country of Freedonia), and the repeal of a poorly targeted tax subsidy, rather than being hailed as curbing wasteful spending, is decried as a targeted tax hike.

Pay-as-you-go (PAYGO) rules limit the growth of tax expenditures to some extent, because they require a “pay for” to be paired with a new tax subsidy, but those rules in turn inadvertently encourage the perverse phenomenon of the Congress Within a Congress, in which the tax-writing committees, having learned how to dispense even lump sum discretionary grant programs through the tax code, can function as a complete mini-Congress. The tax-writing committees now both raise revenues (their traditional role) and spend those new revenues, through increasingly transparent tax subsidies that satisfy both the tax-writing committees’ spending priorities and the PAYGO rules. The resulting package is presented to the two chambers of Congress as revenue-neutral, and therefore implicitly as having no significant distributive or allocative consequences, when instead it should be understood as a “tax and spend” proposal.